MILAN, May 28 (Reuters) - Italian stocks slumped on Monday at the end of a roller-coaster session as investors fretted that new elections could see anti-establishment parties win more support.

Italy’s FTSE MIB benchmark index fell 2.1 percent to its lowest level since early March, while the pan-European STOXX 600 index shed 0.3 percent on a day when activity was limited by market holidays in Britain and the United States.

The Italian index had risen as much as 2 percent in early trade after Italy’s president vetoed the Five-Star and League parties’ choice of a eurosceptic economy minister. The move prompted them to abandon efforts to form a government and raised the prospect of a snap election in the autumn.

But the relief was short-lived as the focus quickly turned to risks that Italy’s election campaign could focus on the country’s continued membership of European institutions and strengthen the populist parties’ hand.

Political worries also hammered Italy’s government bonds and helped put the euro under renewed pressure.

“It’s another moment of uncertainty,” said Gilles Guibout, portfolio manager at AXA IM in Paris.

“Now we need to understand what could be the outcome of a new vote but what’s clear is that Europe will be at the centre of the debate of the next campaign,” he added.

Italian President Sergei Mattarella appointed a former International Monetary Fund official as interim prime minister with the task of planning for snap polls and passing the next budget. That helped Italian stocks end off lows.

BANKS TUMBLE

Italian banks, which are seen as a proxy for political risk due to their big government bond holdings, suffered their biggest one-day fall since Feb. 2017, down 4.1 percent, having jumped more than 3 percent at the open.

Among other country indexes, Spain’s IBEX fell 0.6 percent after news that Prime Minister Mariano Rajoy will face a vote of confidence in his leadership on Friday as corruption convictions handed down to dozens of people linked to his centre-right People’s Party threatened his six-year rule.

“The news dents sentiment given the blockbuster potential optionality,” said Jefferies analysts, adding “there has been significant investor interest in these combo trials”.

Aluminium maker Norsk Hydro rose 1.4 percent after Germany’s economy minister said Berlin was seeking to end a dispute between the United States and the European Union over President Donald Trump’s decision to impose high tariffs on steel and aluminium imports.